Introduction- A brief idea about balanced scorecard,definition
Positive Accounting Theory
The purpose of this report is to analyse the effect of adopting AASB 2 Share-based Payments. Besides, this report will also provide discussions about the reaction of some parties related to this adoption.
In July 2004, there is a significant change in the accounting requirements for share-based payments. The previous standard that governs share-based payment was AASB 1046 Director and Executive Disclosures by Disclosing Entities, which then supersede by AASB 2 Share-based Payments. Under AASB 1046, share-based payments only required to be disclosed. However, AASB 2 requires an entity to reflect on its profit or loss and balance sheet the effects of share-based payment transactions at fair value (Accounting Handbook 2008).
This analysis is done by applying Positive Accounting Theory (PAT). The report covers three main areas, impact of adoption on companies, on managers, and motivation of regulators in developing standards
Since AASB 2 is still new, research papers used in this reports may not
Positive Accounting Theory (PAT) that popularized by Watts and Zimmerman is one of positive theory accounting. PAT is concerned with explaining accounting practices. It is designed to explain and predict which firms will not use a particular method. It does not say something as to which method a firm should use. This is what differentiates positive and normative theories. Normative theories prescribe how a particular practice should be undertaken and this prescription might be a significant departure from existing practice.
PAT focuses on the relationship between the various individuals involved in providing resources to an organisation and how accounting is used to assist in functioning of these relationships. PAT is based on the central economics-based assumption that all individuals’ actions are driven by self-interest and that individuals will always act in an opportunistic manner to the extent that the actions will increase their wealth.
From an efficiency perspective, why could the introduction of new rules on share option accounting be costly for an organization?
Share-based payments have been widely used by many organizations as an incentive tool – attracting and retaining employees, and compensate senior executives. Because there was a significant change in the accounting requirements on share-based payments, this will then affect quite numbers of organizations. The effect on organization can be explained by an efficiency perspective.
Efficiency perspective, which also known as ex-ante perspective, is one of perspective under the PAT umbrella. It considers up-front mechanisms in order to minimize future agency and contracting costs (TB p. 274). ????????
Theorists of efficiency perspective argued that companies adopt particular accounting methods which best reflect their underlying economic performance. By choosing the best methods, it is being argued that investors and other parties will need not to gather as much additional information from other sources. This will consequently lead to cost saving and reducing the risks of investors, which will then increase the value of the company (TB p. 274).
Another effect on the implementation of AASB 2 is that it will reduce the profit of the company, thus the performance of the company will seems to be not so attractive to the potential investors. Unattractive performance of the company may cause the investors to assume that the company has higher risks of default. Thus investors become reluctant to invest in the company or, the investors will require higher return. In other words, the company will be facing a hard time to gain investors confidence or the company will be facing a high cost of capital (TB p. 275).
Since PAT theorists believe that companies will choose the methods best reflect the companies’ performance, this means that there will be no need for regulations to be in place – anti regulation perspective. PAT theorists argued that regulation of financial accounting imposes unwarranted costs on reporting entities (TB p. 275). In the case of share-based payments, by superseding AASB 1046 with AASB 2, this provides restrictions to the company as to limited methods available to choose from. This will create inefficiencies – the companies may not able to choose the method that best reflect their performance.
Besides, by expensing share-based payments, this would harm start-up companies and decrease the entrepreneurial activity of growing companies (Sacho